Goldman Sachs on Monday took a big step toward the possible wide adoption of bitcoin among institutional investors, such as hedge and pension funds.
A step that will undoubtedly reassure some big investors, many of whom are still very reluctant to invest in cryptocurrencies and in particular in bitcoin, the first digital currency in terms of market share.
Goldman Sachs (GS), one of the big names in traditional finance, said on Monday that it has just carried out its first over-the-counter (OTC) crypto options trade.
The firm traded a bitcoin-linked instrument called a non-deliverable bitcoin option (NDO), which is a derivative tied to bitcoin’s price that pays out in cash, Goldman Sachs said.
Options are used by crypto investors to hedge risks or boost yields, and over-the-counter transactions are larger trades negotiated privately.
"We are pleased to have executed our first cash-settled crypto currency options trade with Galaxy," said Max Minton, Asia Pacific head of digital assets for Goldman Sachs. "This is an important development in our digital assets capabilities and for the broader evolution of the asset class."
The transaction carried out by Goldman Sachs was facilitated by Galaxy Digital, a company that invests in crypto and especially in bitcoin.
Galaxy, a global provider of blockchain and cryptocurrency financial services for institutions, was founded and is run by billionaire Mike Novogratz, a bitcoin evangelist. Novogratz is also a former Goldman Sachs banker.
"This marks the first OTC crypto transaction by a major bank in the U.S., as Goldman Sachs continues expanding its cryptocurrency offerings, demonstrating the continued maturation and adoption of digital assets by banking institutions," Galaxy said in a statement.
Is Bitcoin a Mature Asset?
This move is an important step in the development of the crypto market for large investors, because OTCs mean that Goldman Sachs will act as a principal in the transaction.
It is therefore a kind of expansion of Goldman Sachs' activities into cryptocurrencies — but more importantly, it legitimizes the currencies as stable enough to be vouched for by large financial institutions.
Goldman Sachs' involvement also sends a signal to mainstream investors that cryptocurrency-related assets have matured.
"We are pleased to continue to strengthen our relationship with Goldman and expect the transaction to open the door for other banks considering OTC as a conduit for trading digital assets," said Damien Vanderwilt, co-president, and head of global markets at Galaxy Digital.
"Goldman's continuing trust in us is a testament to Galaxy's expertise and ability to meet the evolving demands by institutions as crypto solidifies itself as the fifth asset class."
Major Wall Street banks are generally staying away from cryptocurrencies and bitcoin, with one of the main reasons they give is that traditional financial markets are highly regulated.
The concern that offering financial services related to cryptocurrencies might increase that burden of regulation is substantial.
But the change is also a cultural switch.
Legacy banks deplore that there is still too much uncertainty surrounding the regulation of the crypto industry.
While President Joe Biden recently issued an executive order that outlines a roadmap for the supervision of the crypto sector, one of the only key rules remains KYC (know your customer), and many experts believe that this is not enough.
The Market is Changing
However, there have been notable changes in recent months.
Top financiers like Ken Griffin, Ray Dalio and Bill Gross have thrown their support behind cryptocurrencies, a sign that the lines are moving at hedge funds, which bodes well for bitcoin.
As for Goldman, the firm opened up trading of non-deliverable forwards, a derivative tied to bitcoin’s price that settles in cash. It's also offering exchange-listed options and futures trading in bitcoin and ethereum.
In addition, the transaction announced on Monday also "represents a continuation of the bank's partnership with Galaxy Digital to deepen its crypto capabilities, which included facilitating the bank's first CME Group Inc. bitcoin futures transaction last year."
Goldman is exploring more crypto derivatives trading, according to Bloomberg.
